The 2017 comparative income statement and the 2017 comparative statement of Darugo enterprises Ltd have just been distributed at a meeting of the companys board of directors. The member of the board of directors raises a fundamental question:

This question is especially troublesome because 2017 showed record profit. As the Chief Financial (CFO) of the company, you must answer the question.

DARUGO ENTERPRISES LTD

COMPARATIVE STATEMENT OF COMPREHENSIVE

INCOME FOR THE YEARS ENDED DECEMBER

31, 2017 AND 2016

	2017	2016
	Sh000	Sh000
Sales Revenue	452	310
Cost of goods sold	(221)	(162)
Gross Profit	231	148
Operating expenses:
Salary expense	48	28
Depreciation expense	46	22
Interest expense	13	20
Amortization expense on patent	11	11
Total operating expenses	118	81
Operating income	113	67
Gain on sale of equipment
(SALES PRICE SH. 33,000)	__	18
Loss on sale of land (sales price Sh. 61,000)	__	(35)
Earnings before taxes	113	50
Income taxes	34	15
	__	___
Net income/Profit	79	35

DARUGO ENTERPRISES LTD

COMPARATIVE STATEMENT OF COMPREHENSIVE

INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017	2016
	Sh. 000	000
CURRENT ASSETS
Cash	41	63
Accounts Receivable (Net)	72	61
Inventories	194	181
Total current Assets	307	305
NON-CURRENT ASSETS
Long-term investments	31	-0-
Property, Plant & equipment	361	259
Accumulated depreciation	(244)	(198)
Patents	177	188
Total Non-current assets	325	249
Total assets	632	554

LIABILITIES & SHAREHOLDERS EQUITY

CURRENT LIABILITIES

	2017	2016
Short-term borrowing	32	101
Accounts payable	63	56
Accrued liabilities	46	32
Total current Liabilties	141	189
Total current Assets	307	305
NON-CURRENT LIABILITIES
Long-term loan	147	163
Total liabilities	288	352
SHAREHOLDERS EQUITY
Share Capital	149	61
Retained earnings	195	141
Total shareholders equity	344	202
Total liabilities & shareholders
Equity	632	554

Required

1. Prepare a Statement of cash flow for 2017 in the format that best shows the relationship between net income and operating cash flow. The company sold no plant assets or long term investments and did not borrow during 2017. The changes in all current accounts except short-term borrowings arose from operations. There were no non-cash investing and financing transactions during the year. ( 10 marks)
2. Answer the board members question: why is the cash balance so low? In explaining the business cash flows, identify two significant cash receipts that occurred during 2016 but not in 2017. Also point out the two largest cash payments during 2017. (10 marks)
3. Considering net profit and the companys cash flows during 2017, was it a good year or a bad year? Give your reasons. (5marks)